Discover published sets by community

Explore tens of thousands of sets crafted by our community.

Categories

Mathematics

Mathematical Finance

Net Present Value (NPV) and Internal Rate of Return (IRR)

Flashcards

0/12

Still learning

Weighted Average Cost of Capital (WACC)

Formula:

WACC = \frac{E}{V} \times Re + \frac{D}{V} \times Rd \times (1 - Tc)

Decision Rule: Use this as a hurdle rate for NPV calculations.

Payback Period

Formula:

\text{Payback Period} = \frac{Initial Investment}{Annual Cash Inflow}

Decision Rule: Shorter payback periods are preferred.

Capital Asset Pricing Model (CAPM)

Formula:

Expected \, Return = Risk-Free \, Rate + Beta \times (Market \, Return - Risk-Free \, Rate)

Decision Rule: Use this model to evaluate the expected return on an asset.

Net Present Value (NPV)

Formula:

NPV = \sum_{t=0}^{T} \frac{C_t}{(1 + r)^t}

Decision Rule: Invest if NPV > 0.

Profitability Index (PI)

Formula:

PI = \frac{PV \, of \, Future \, Cash \, Flows}{Initial \, Investment}

Decision Rule: Invest if PI > 1.

Breakeven Analysis

No specific formula, it's the point at which costs equal income. Decision Rule: Target sales volume to achieve at least breakeven.

Internal Rate of Return (IRR)

Formula:

0 = \sum_{t=0}^{T} \frac{C_t}{(1 + IRR)^t}

Decision Rule: Invest if IRR > required rate of return.

Discounted Payback Period

Formula not fixed, it's the period where discounted cash flows equal initial investment. Decision Rule: Invest if the discounted payback period is within the acceptable time frame.

Operating Leverage

Formula:

Degree \, of \, Operating \, Leverage = \frac{% \, Change \, in \, EBIT}{% \, Change \, in \, Sales}

Decision Rule: High operating leverage means a firm is more sensitive to changes in sales.

Accounting Rate of Return (ARR)

Formula:

ARR = \frac{Average \, Annual \, Profit}{Initial \, Investment}

Decision Rule: Invest if ARR > target rate.

Modified Internal Rate of Return (MIRR)

Formula:

MIRR = \left( \frac{FV \, of \, Positive \, Cash \, Flows}{PV \, of \, Negative \, Cash \, Flows} \right)^{\frac{1}{N}} - 1

Decision Rule: Invest if MIRR > cost of capital.

Operating Cash Flow (OCF)

Formula:

OCF = EBIT + Depreciation - Taxes

Decision Rule: Higher OCF indicates better ability to generate cash.

Know

Still learning

Click to flip

Know